NEW YORK The euro gained against the dollar on Monday, buoyed by appetite for risk on optimism that Greece will receive more funding and signs of progress on resolving a looming U.S. fiscal crisis.
The common currency shared by the 17 euro zone countries, however, is down 1.4 percent so far in November and analysts said concerns about differences of opinion between euro zone officials and the International Monetary Fund may limit the euro's gains.
European officials are expected to discuss a two-year funding plan for Athens at a meeting on Tuesday, which would postpone any longer-term solution until after a September 2013 German general election.
"Hopes that maybe we will get better news out of Greece is providing a little bit of support to the euro," Daragh Maher, currency strategist at HSBC. "I am not supremely confident (of a resolution being reached on Tuesday). The history of this process has been one of delays."
But he said investors would not sell the euro aggressively because the issue was still likely to be resolved at some point. He added that a close above the 200-day moving average would increase investor confidence in holding euros.
The euro was last up 0.3 percent at $1.2772, having earlier hit a high of $1.2789. Traders said it may struggle to vault last week's high of $1.2801.
European Central Bank policymaker Joerg Asmussen said on Sunday the euro zone should agree on two years of funding for Greece, while German Finance Minister Wolfgang Schaeuble said he was banking on a deal on Tuesday.
But they may encounter opposition from the IMF, which wants a permanent solution to Greece's debt problems.
Analysts at Morgan Stanley recommended buying the euro at $1.2730, with a target of $1.33 and a stop at $1.2650.
They expected progress towards a compromise on the next payment of funds for Greece, which should support the euro, and that Spain would apply for a bailout, paving the way for the European Central Bank to buy its bonds.
FISCAL CLIFF CLIFFHANGER
Risk appetite improved, with world stock markets recovering some of their sharp losses last week, fueled by comments from U.S. lawmakers who indicated that compromises are possible in negotiations to avert $600 billion in tax increases and spending cuts due to start in January.
Many believe this "fiscal cliff" threatens to send the U.S. economy back into recession, but the dollar would benefit in this scenario due to risk aversion.
The dollar should weaken against the Canadian dollar and British pound into year-end, according to Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
"The focus post-US election has been on the fiscal cliff, which we recognize as an important risk, however we believe that markets have moved too far into tunnel vision and are neglecting other important dollar drivers," she said.
"The most important of which is the Fed meeting on December 12, where we expect QE3 to be expanded to include Treasuries (at the conclusion of Operation Twist)."
The Fed's Operation Twist entails selling short-term securities in exchange for long-term bonds.
Against the yen, the dollar last traded flat at 81.24 yen, according to Reuters data.
Investors have been selling the yen after elections were called for December 16 and the leader of the opposition Liberal Democratic Party called on the BOJ to print "unlimited yen" and set rates at zero or below.
But investors were wary of pushing it much lower before a BOJ policy announcement on Tuesday. most analysts expect it will not announce additional monetary easing.
"It's most unlikely the BOJ will make major changes this meeting, but the trend (for the yen) seems to be changing," said Audrey Childe-Freeman, head of foreign exchange strategy at BMO Capital Markets.
Currencies showed little reaction to U.S. housing data showing home re-sales unexpectedly rose in October while homebuilder sentiment rose to its highest in more than six years.
(Additional reporting by Anooja Debnath in London; Editing by Chizu Nomiyama)
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